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A Tough Holiday Quarter for Urban Outfitters

Comparable sales slumped and higher costs knocked down profitability, but plenty of buybacks led to per-share earnings growth.

Specialty apparel retailer Urban Outfitters(NASDAQ:URBN) reported its fourth-quarter results after the market close on Monday, March 7. Revenue was essentially flat for the company, with comparable retail sales slumping. A lower gross margin and higher operating costs drove down profitability, but extensive share buybacks led to a small increase in per-share earnings. Here's what investors need to know about Urban Outfitters' fourth-quarter results.

Image source: Urban Outfitters.

The raw numbers

Metric

Q4 2015

Q4 2014

Growth (YOY)

Sales

$1.013 billion

$1.011 billion

0.2%

Net Income

$72.9 million

$80.3 million

(9.2%)

Diluted EPS

$0.61

$0.60

2.8%

Data source: Urban Outfitters Q4 earnings report.

What happened this quarter?Comparable-store sales slumped at Urban Outfitters' two largest brands, while higher costs caused a drop in profits.

Wholesale revenue rose 29% year over year, partially because of delayed shipments during the third quarter.

Gross margin declined by 12 basis points year over year, driven by increased direct-to-consumer sales penetration, the transition of a fulfillment center, and higher occupancy costs. Partially offsetting these negative items was an improvement in the Urban Outfitters brand markdown rate.

Operating expenses grew 3.1% year over year, leading to the drop in net income.

Urban Outfitters' share count was reduced by 10.8% year over year, driven by $465.3 million of share buybacks during the fiscal year. This allowed EPS to grow despite a decline in net income.

The company opened a total of 31 new stores during the year and closed five stores. There are now 240 Urban Outfitters stores, 218 Anthropologie Group stores, and 114 Free People stores.

What management had to sayUrban Outfitters CEO Richard A. Hayne found reason to be optimistic despite a generally lackluster fourth quarter. "While apparel sales underperformed during the fourth quarter, I am pleased with the merchandise margin improvement delivered by the brands. Additionally, our expansion categories performed above our expectations and continue to give us confidence in our future growth opportunities," he said in the company press release.

The company pre-announced its holiday sales results earlier in the month, and Hayne provided some additional color at that time: "Our January sales results mirrored the holiday period with direct-to-consumer results continuing to outpace store performance on a 'comp' basis. The brands managed their inventories well which should allow for a smooth transition to the spring season."

Looking forwardThe fourth quarter wasn't a particularly good one for Urban Outfitters. Revenue barely grew, with growth driven in part by delayed wholesale shipments, and comparable sales at both Urban Outfitters and Anthropologie stores slumped, a deterioration compared to the third quarter. The company managed to keep markdowns in check, but higher costs in other areas, namely marketing and technology, drove down profitability.

While EPS grew during 2015 thanks to share buybacks, net income has now declined for two straight years, despite rising revenue. The company's two biggest brands, Urban Outfitters and Anthropologie, will probably need to return to comparable sales growth before the company can begin growing earnings once again.